Biggest ESG risk is ignoring ESG (and greenwashing): CICA panel

The biggest risk associated with ESG (environment, social, governance) is ignoring it – companies are increasingly expected to identity, implement and report on ESG and while Europe is leading the way, US companies will have to catch up.

That was one of the themes of a panel discussion at the at the Captive Insurance Companies Association’s (CICA) annual conference, taking place in Tucson this week (March 6-8). The session, called ‘Why are ESG Risks Relevant to Captive Insurers?’ was moderated by Richard Cutcher, Founder and Executive Producer, Global Captive Podcast.

Other panellists included Michael Douglas, Director – Business Development, Aon; Karen Hsi, Program Manager, Fiat Lux Captive Insurance Company, University of California Office of the President; and James Stewart, Representative, Guernsey International Insurance Association.

Opening the debate, Cutcher acknowledged that consumers, shareholders, and regulators are increasingly applying ESG factors to their assessment of a company’s performance and value. He said there can be a degree of scepticism of the relevance of this to captives, but said this is changing. “The real question is what role will captives play?” he said.

The panel acknowledged that while this trend is more pronounced in Europe, the SEC announced in October 2021 it plans a phased introduction of ESG reporting with tiered compliance for small and large companies. Aside from the reputational risk of performing poorly, litigation risks are expected to be increased as more reporting is required, while some re/insurers are factoring ESG performance into underwriting decisions.

On the point of litigation, Cutcher noted that this is a potential risk for captives increasingly taking on directors’ & officers’ (D&O) risks. “Captives are writing more D&O business just as more reporting is being required around this issue. Where directors are accused of overselling what they are doing on this front – or greenwashing – this brings litigation risks that could ultimately fall on captives.”

His acknowledged that ESG is taking more time to come to the US but added that it is increasingly part of the broader conversation for companies. “It is coming down the pipeline. That is the way the world is moving,” she said. “It is starting to trickle down to the risk management and insurance side of things, but we are behind what is happening in Europe.”

Douglas admitted that he had been previously sceptical of the relevance of ESG to captives, viewing it as something that would only increase costs with little tangible benefits. But he is now a convert. He said he then released that he was looking at it in the wrong way. “It is about a change in mindset,” he said.

“While the EU is driving it, there will be a knock-on effect. The biggest risk for companies when it comes to ESG is ignoring it. It is no longer touchy feely. Companies are being forced by investors, regulators and customers to embrace this – they must be seen to be identifying, implementing and reporting on their ESG.”

Douglas admitted this can be a complex issue. He noted that there are almost 40 separate agencies that pertain to assess ESG standards – and each differs in its approach. “It is enough to make your teeth itch,” he said. “And that means a lot of companies see it as too hard.”

But he says he then realised that captives, by their very nature, are designed to solve the problems of the parent company. “That was a light bulb moment for me,” he said. “And one thing COVID did was show us how captives can be used more intelligently. The same applies to ESG now and the way that can be applied to captives.”